If Indian economy is indeed weak and needs deep rate cuts, why all growth projections show high accelerated growth?

Yesterday released MPC minutes were full of contradicting views. Some members believed that 7th Pay commission will lead to higher inflation, but one member said it will just be transient. Some expected farm Loan Waivers to have higher fiscal slippage but the same member said worries are overstated.

However, this one from Michael Patra who votes for Status quo summed up much of the ironies in projection industry of Indian economy:

44. I have consistently maintained that an inflation targeting framework has to be forward-looking. Setting monetary policy by looking over the shoulder at inflation prints of the recent past runs the risk of time inconsistency with respect to the target. A good example of forward-looking time-consistent monetary policy is the monetary policy committee’s (MPC) first decision in October 2016. In its resolution, the MPC presciently gave forward guidance: “It (the MPC) notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes…”. Correctly anticipating recent inflation developments back in October 2016, the MPC took monetary policy action that was consistent. To reduce the policy rate now – when inflation is set to rise in a couple of months – will be inconsistent and will undermine credibility.

45. Households’ inflation expectations three months ahead and a year ahead have gone up! More than 70 percent of respondents expect prices to increase, with the sharpest rise expected in prices of household durable goods, followed by prices of services. It seems to me that households have completely discounted CPI inflation’s historic low. Professional forecasters, who are regarded as forward-looking, also see inflation rising over the rest of the year. In this context, I have also consistently held that in reading forecasts, it is the direction rather than the level that matters.

46. There are many moving parts in inflation’s near term path that need to settle. First, the increase of 106 per cent in house rent allowance for central government employees will feed into the CPI cumulatively – starting from July, it will likely reach its maximum effect in December. Given this incremental pattern of build-up, it could potentially stir up second order effects even as the first order impact is getting complete. Second, there is uncertainty around the inflationary impact of the roll-out of the GST – the release of pending price revisions; restocking after clearance sales; unwinding of arrangements that were made to prepare for initial difficulties in pass through of tax credits. My sense is that one-off inflation effects could emerge in the near months. Third, base effects will reverse and turn unfavourable from August – this should go to the top of the hierarchy of moving parts. Fourth, seasonal spikes in inflation-sensitive food prices are already in evidence. The question is: will there be spillovers that induce generalisation of the inflation momentum?

47. All these factors could come together in CPI readings from August. If that turns out to be the case, why not stay on hold now, watch the shape and slope of the upturn and if it is benign, deliver credible monetary policy that supports the economy? In the context of the latter, it is paradoxical that weak aspects of economic activity are widely cited, but every projection of growth – official; multilateral; independent – shows that it is expected to accelerate in 2017-18!



One Response to “If Indian economy is indeed weak and needs deep rate cuts, why all growth projections show high accelerated growth?”

  1. Linkfest - Kairos Capital Says:

    […] Mostly Economics – Michael Patra: Paradoxical economic activity! […]

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